24 May 2018
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FOMC minutes show little concern on inflation overshoot

Fed meeting minutes reflected very little concern about overheating and inflation overshooting too much.


By Emirates NBD Research


Fed meeting minutes reflected very little concern about overheating and inflation overshooting too much. While Fed officials expect inflation, in the short term, to rise faster than what they had anticipated in the March meeting, the longer term inflation outlook remained well balanced. Markets interpreted the minutes as dovish leading to fall in UST yields and steepening of the UST curve.

New home sales in the US fell to 662k in April vs consensus of 680k. Also the previous month’s data was revised downwards from 694k to 672k. The decline is not seen to be of concern as sales still remain more than 11% higher than same time last year and compares favourably with average of 613k in 2017. In another data, the preliminary reading of the Markit US PMI came in stronger than expectations with Manufacturing PMI in April reaching 56.6 (vs 56.5) and Services PMI rising to 55.7 from 54.6 in the previous month. The Manufacturing PMI reading is the highest since September 2014 and reflects improvements in employment even though new orders fell to 58.1 from 58.8.

Contrasting the strong growth in the US, preliminary data on Euro-area PMI reflected Manufacturing PMI falling to 55.5 and Services PMI falling to 53.9 from 56.2 and 54.7 respectively in the previous months. Nevertheless, we expect today's account of the ECB's April meeting to indicate that the bank remains on track to bring asset purchases to an end this year.

U.K. inflation slowed to a 13-month low in April, with headline inflation falling to 2.4% from 2.5% in March and core CPI declining to 2.1% from 2.3% in the previous month. The reading for April is in line with BOE officials’ predictions for the second quarter as a whole. They see a further drop to 2.2% by year end, before falling to the 2% target in two years, partly because the pass-through of the pound’s depreciation since the Brexit vote is happening faster. Market implied probability of a rate hike at the next BoE meeting is close to zero, although one rate hike is still expected before the end of the year.

Turkey's central bank raised its key interest rate by 300 basis points to 16.5% after an emergency meeting. President Erdogan has futher assured investors that Turkey would follow global principles on monetary policy. 


Source: Bloomberg,Emirates NBD Research


Fixed Income

Treasuries closed higher as minutes of the last Federal Reserve meeting indicated a dovish tilt even as it indicated that rates would be increased at its next meeting in June. Beyond June, the minutes said that members ‘expressed a range of views on the amount of further policy firming that would likely be required’. Yields on the 2y UST, 5y UST and 10y UST closed at 2.52% (-4bps), 2.82% (-7bps) and 2.99% (-6bps) respectively.

Regional bond markets followed the move in benchmark yields. The YTW on the Bloomberg Barclays GCC Credit and High Yield index dropped 3 bps to 4.65% and credit spreads widened 3 bps to 187 bps.


JPY outperformed in the Asia and Europe sessions, benefiting from safe haven bids. USDJPY broke below the former supporting 200 day moving average (110.21), erasing most of the gains realized since the 15th of May. Should the price achieve a weekly close below the 50% one year Fibonacci retracement of 109.65, further declines towards 108 can be expected. However, a weekly close above this level will likely result in a retest of the 61.8% one year Fibonacci retracement (110.85).

Elsewhere, the Euro hit a 6 month low after softer after PMIs showed that the expected rebound in Eurozone activity remains absent and the cool down continues. Should the selling pressure continue, a daily close below 1.1660 (not far from the 38.2% one year Fibonacci retracement of 1.1662), is likely to cause further declines towards 1.1450.

Finally GBP was a casualty of softer than expected inflation data in April, with GBPUSD reaching a new 2018 low. The price has now remains well below the 50% one year Fibonacci retracement (1.3483) with a weekly close below this level exposing cable to further declines towards 1.32, a level last seen in November 2017. 


Developed market equities closed mixed with the S&P 500 index adding +0.3% and the Euro Stoxx 600 index losing -1.1%. While weak PMI data weighed on European stocks, US equities received a boost from a dovish tilt in the Federal Reserve meetings.

Regional equities closed mixed with the DFM index losing -0.9% and the ADX index adding +1.3%.It appeared that investors took the opportunity to lock-in some gains following a positive start to the week. First Abu Dhabi Bank was a major outperformer with gains of +4.3%. Emaar and Emirates NBD dropped -1.5% and -1.9% respectively.


Oil prices fell a little as U.S. crude inventories unexpectedly swelled by 5.8 million barrels last week as per the latest EIA report.  Brent crude closed at $79.45/b.  Saudi and Russian energy ministers are set to meet at the St. Petersburg economic forum to discuss oil prices and market volatility.

Gold benefited from ongoing uncertainty created by the trade conflicts and closed the day slightly higher at $1295.24

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Emirates NBD Research Research Analyst

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